2007 General Meeting Assemblée générale 2007 Montréal, Québec

1. Canadian Institute of Actuaries L’Institut canadien des actuaires 2007 General Meeting Assemblée générale 2007 Montréal, Québec IP-18 Group Expenses Pricing Tom Strickland, FSA, FCIA

2. Pricing for Expenses • Key goals • Data requirements • Methodology options • Process details for one option

3. Key Goals • Should cover all expenses over the entire block (ideally for each benefit) • If not - must understand the gaps and cover them somewhere • Expense loads by case size and benefit need to be reasonably close to market levels • Loads should be reasonably related to real differences in cost by benefit and case size • Should be simple to understand and update

4. Data Requirements • Expenses allocated from major cost centres to benefits • Most companies would have at least this much • But it doesn’t tell you how to allocate by case size • Pricing needs to set a reasonably continuous slope of expenses by case size (formula, or if banded, many bands)

5. Data Requirements - Cont’d • Group by group metrics • Needed to test that the pricing methodology will recoup required total expenses • Need data by group for any driver you are going to use • Possible drivers: #certificates, #members, #policies, #billing divisions, $premium, $claims

6. Data Requirements - Cont’d • Research on market expense loads • Fraser and other industry surveys • Information received at time of quote

7. Assumptions • Key data requirements are all available • We are pricing a single benefit, expenses for that benefit available by major cost centre • We are pricing for expenses on a relatively homogeneous block • May have to look at small group separately (usually very streamlined processes)

8. Steps in the Process • Decide the basic methodology (drivers) • Identify the cost per driver • Validate the cost allocation method against surveys and total expense needs. • Tweak driver costs if necessary to produce the right total expenses with reasonably “industry-standard” slopes

9. Step 1 - Decide Basic Methodology Option 1 : • Simple banded table of % premium/claim loads varying by $ claims level - eg • $0-5,000 annual claims - 20% premium/25% claims • $5-10,000 annual claims - 18% premium/23% claims • Etc.

10. Decide Basic Methodology • Option 1 - Pros and Cons • Simple and easy to work with • Can be developed to roughly match industry slopes identified by surveys, competitor renewals • Easy to validate vs surveys and your expense needs • Could develop it based solely on market research - no need for detailed expense analysis • But - it misses some nuances • Same expenses for 500 lives with 10K benefit as 50 lives with 100K benefit

11. Decide Basic Methodology Option 2: • Multiple Drivers – e.g. • Per policy • Per billing division (not available at quote?) • Per certificate/member • Per $ expected claims (maybe banded as Option 1)

12. Decide Basic Methodology • Option 2 - pros and cons • More complex to develop and update • More difficult to understand • But - can more accurately reflect unusual groups (eg many lives with small volume, groups with many small billing units) • Assume we choose option 2

13. Step 2 - Identify Cost Per Driver • 84% of all life costs for one company came from seven major cost centres - marketing, sales, underwriting, billing/admin, claims, IT, corporate/finance • Interview the seven (+?) function heads or their reports

14. Identify Cost Per Driver • Interviews identify their 2-3 major tasks • Get time studies by case size for key tasks if possible • Ask for staffing requirement models, if available • If not, ask questions that will flesh out for each key task • Fixed expenses • Relative cost of 10/25/50/100/200/500 life group

15. Identify Cost Per Driver • From the questions and time studies, decide how much of each area’s expense is variable based on the key drivers: • Number of policies / billing divisions • Number of certificates/members • $ Claims • Nothing (fixed)

16. Identify Cost Per Driver • Also need to consider major non-staff costs – e.g. • Marketing brochures variable by #certificates/policies • IT hardware/software variable by #certificates • Claims costs may be the only benefit-specific analysis

17. Identify Cost Per Driver • Accumulate all expenses variable by #policies - divide by #policies to produce base cost per policy • Do the same for all other drivers • Still unallocated will be fixed expenses in the line and other “overhead” items. • These are often allocated prorata according to previous driver-based allocations

18. Steps 3 and 4 - Validation • Apply the new costs to the total number of policies, certificates, etc. in next year’s business plan to make sure they produce sufficient total expenses • Compare the results by case size to industry surveys to make sure it is in line with the market • Tweak factors as necessary – e.g. allocate fixed/overhead expenses using a banded claim approach to better match up with competitor loads

19. Pricing For Group Expenses Questions?